Asiana faces tough competition from rival low-cost carriers

Bloomberg

Asiana Airlines Inc., South Korea’s No 2 carrier, is increasingly dogged by rising borrowing costs just as stiff competition from low-cost rivals looms over a potential rebound in its China business.
The Bank of Korea’s first interest-rate increase since 2011 may add to the Seoul-based carrier’s woes by pushing up funding costs, according to Shinhan Investment Corp. The premium that investors demand to hold Asiana’s bonds jumped after its credit rating was cut to BBB-, one level above junk grade, by Korea Investors Service.
China restricted group tours to South Korea after the latter deployed the US anti-missile system Thaad, but the two nations agreed to put aside the dispute in October. While that may help boost its Chinese business, concern remains about the health of its balance sheet: Asiana’s short-term debt made up 47.5 percent of its total at the end of September from 23.2 percent in 2013, providing less leeway for the firm to make repayments, according to KIS.
“The BOK rate hike could make it more difficult for lower-rated companies to raise funds considering that absolute yields are rising,” said Kim Sang-hun, a credit analyst at Shinhan Investment in Seoul. “They will likely continue to face a difficult funding environment next year unless the government does something.”
The airline has limited possibility to improve its profits because of the expanding presence of low-cost carriers and its delay in modernising its fleet, said KIS, the local affiliate of Moody’s
Investors Service. Asiana expects its ratings will be restored as its earnings will likely show a big improvement due to better relations with China and the 2018 Winter Olympics.
Asiana has more than $460 million of straight bonds and commercial paper coming due next year, according to data from Korea Securities Depository. Airlines often need to raise funds to modernise their fleet even when borrowing costs are rising, and such investments don’t always boost their business, according to Shinhan’s Kim.
More than half of Asiana’s total outstanding notes were asset-backed securities linked to its accounts receivable, according to its third-quarter financial report. That means the airline is effectively using future cash flow
in advance.
The rise of Korean low-cost carriers also threatens Asiana. For the cheaper airlines, the number of passengers on international flights connected to Korea rose 32.3 percent in October from a year earlier, according to the transport ministry. Such passengers on full-service carriers dropped 3 percent.
Asiana and low-cost carriers are also competing on some of the same Asian routes: the region accounted for about 60 percent of Asiana’s total passenger sales in the third quarter. The airline is fighting back by starting a low-cost carrier of its own called Air Seoul Co., as an IPO is held for an LCC affiliate of bigger rival Korean Air Lines Co.
“We’ll need to monitor whether Asiana’s budget carrier Air Seoul business is going well,” said Kim at Shinhan Investment. “That’s key for Asiana.”